Creating a large conglomerate in the food industry

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Reference no: EM133647271

Kraft Heinz merged in 2015 creating a large conglomerate in the food industry. They committed to increased profitability through cost cutting. They set bonus structures for the procurement team to drive down costs. In the beginning it worked with large gains through tough negotiations. in 2018 the low cost decreases had reached as low as they were going to go and cost savings levelled out. Senior leadership doubled down and set unrealistic goals. This created a high pressure cost cutting environment which incentivized the wrong behaviours. This cam The procurement team negotiated low costs now for longer term commitments through

1. Rebate transactions, Committing to future needs by giving discounts today.

2. Negotiated Clawback transactions - cash payments now for pre negotiated future price increase.

These were reported on financials and to investors in a deceptive manner. They reported the negotiated cost savings while leaving out the future liabilities that were committed to so the company could say they achieved their mission of cost decreases. This worked on paper for a few years, giving significant bumps to profits and valuations but as the future commitments started to come due profits deteriorated. While things were good, many people were paid significant performance bonus.

Once the smoke and mirrors show was found out when auditors started digging in after profits deteriorated, the stock dropped dramatically, the company lost $10 Billion one calendar year when they corrected the books, and many of the senior executives paid significant fines.

This one is tricky with the directives and decisions coming straight from senior leadership however, there should be checks and balances in place through Contract Administration team, legal, business ethics department, etc. A lot of people would have looked the other way when it didn't feel right in this situation.

Reference no: EM133647271

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